Debit vs. credit Pros, cons and protections for your money

Alex Thomas Sadler

Whether you have a debit card, a credit card or both, you can get yourself into some serious financial trouble without a good understanding of how each one works and the differences between the two.

The two cards may seem pretty similar — both plastic, both have your name and a bunch of numbers, and both can be used almost anywhere — but that’s about as far as the similarities go.

In fact, debit and credit cards are two very different things. It’s crucial that you understand how each card works, so you can make the best decisions regarding how and when to use each one. Although you may already know some things, there are a lot of lesser-known perks and dangers that come with both debit and credit cards.

This guide takes you through the basics of how each card works, the pros and cons, and a few other things you need to know in order to control and protect your money!

And remember, you don’t have to be a financial pro — you just need to have the right information and a little common cents!

Debit vs. credit: The basics

A lot of people stick with a debit card as a way to control their spending and avoid racking up big credit card debt because you can’t spend what you don’t have with a debit card. In the aftermath of the Great Recession, this strategy became a very popular one as many people were forced to rethink their spending routine.

But debit cards are full of hidden dangers — and what’s confusing is that these dangers are often the same features that make them an appealing alternative to credit cards.

So let’s take a look at how each card works.

Debit cards

  • A debit card is linked to your checking account.
  • Any time you make a purchase, the money comes directly out of your account.
  • Because the card is linked to your checking account, you can only spend whatever money you have in your account.

Credit cards

  • When you swipe a credit card, you’re spending someone else’s money — money the bank or credit card company has given you access to.
  • And that money isn’t free — when the bank agreed to lend you the money, you agreed to pay a fee for it in the form of interest.
  • So if you charge a bunch of stuff on a credit card and pay the bill in full before it’s due, you don’t pay any interest — because that would mean the bank got all of its money back.
  • When you don’t pay the bill in full, meaning you start the next month with a balance on the card, you will be charged interest, which is added to the total balance.

Pros and cons

Now that you have a basic understanding of how debit and credit cards work, it’s important to know the pros and cons of each.
But just a heads up, even though certain features are considered pros, there may be cons that cancel them out.

Pros of debit cards

  • A debit card is linked to your bank account, so you can only spend what you have. This is what makes debit cards appealing for a lot of people, since that restriction can help you control your spending.
  • You can use it pretty much anywhere.
  • Since the money comes right out of your account, you know how much you have left for the month.
  • You can get cash with a debit card — so if you need actual paper money, you can use your debit card at an ATM or to get cash back at a store.
  • And with debit cards, you don’t pay interest on the money you spend — since it’s your money.

Pros of credit cards

  • You can use a credit card pretty much anywhere.
  • A credit card can give you immediate access to money you may not have in your checking account, like if you need to cover something you can pay back with your next paycheck. Just make sure you can pay it back before the bill is due.
  • Using a credit card for emergencies is not ideal (which is why you need emergency savings), but it can be a last resort if you’re really in a bind,
  • On the same note, a credit card also gives you flexibility. You shouldn’t go crazy, but as long as you can pay off the balance in full before the due date, you won’t be charged any interest, and that can give you some flexibility throughout the month and between paychecks.
  • One of the biggest benefits of a credit card is that it can help you build credit — as long as you use it responsibly.
    • If you pay your bills in full and on time each month, those on-time payments help improve your credit score, which can get you lower interest rates down the road on things like a car loan or mortgage.
    • Basically, making on-time payments gets lenders to trust you more — so you always want to pay the bill in full and on time each month.
  • Credit cards also come with rewards, which vary based on the card. Some examples are cash back, airline miles, discounts, additional insurance coverage and more. There are tons of different rewards programs out there. Some even offer additional warranties or insurance coverage on certain purchases, like cell phones.
  • One of the best features of credit cards is the protections they offer, which are much better than those offered on debit cards.
    • If your credit card number is stolen, but not the physical card, “you are not responsible for unauthorized charges under federal law,” according to the Consumer Financial Protection Bureau.
    • If the actual card is stolen, you are liable for no more than $50 in authorized charges — as long as you report it to your card issuer. Some issuers won’t even charge you the $50.
    • Also, when someone makes fraudulent charges on your credit card, no money actually leaves your hands. So while you get it straightened out, you aren’t stuck with a huge chunk of your cash missing – like you are when debit card fraud occurs.

Cons of debit cards

This is where you’ll see how some of the pros of debit cards can easily become cons if you aren’t careful.

  • Debit cards can actually be riskier than carrying cash. It’s not great if someone steals your cash, but since your debit card is linked to your bank account, if someone steals your card, they could get access to every cent in your bank account.
  • Because you can only spend what’s in your account, that really limits your overall spending ability.
  • Fees: Although there typically aren’t fees associated with a checking account (besides overdraft fees), there are several fees you could face with a debit card depending on how you use it. (If you are paying an annual fee for your checking account, it’s time to shop for a new one!) Here are some common fees people face with debit cards:
    • Foreign transaction fees: Many banks charge you a fee when you use your debit card to make a purchase or withdraw money abroad.
    • ATM fees: Many banks also charge you a fee to withdraw money from an ATM that’s not affiliated with your bank.
    • Overdraft: If you overdraw your account, you’ll be charged a fee.
    • Keep in mind that specific fees will vary depending on your bank and your card.
  • Another downside to debit cards is that they don’t help you build credit, like credit cards do — and building a good credit history of on-time payments is important for your overall credit and credit score — especially when it comes time to get a big loan for something like a car or house.
  • The biggest downside to debit cards is the lack of protections they offer for you as a consumer. Here’s a closer look:
    • If you report the card as lost or stolen within two business days, you won’t be responsible for more than $50 of unauthorized transactions.
    • If someone uses your physical ATM or debit card without your permission (meaning it was stolen) and you report the fraudulent charges within 60 days after your statement is mailed to you, you could lose as much as, but no more than, $500.
    • If someone uses your card number to make a fraudulent charge, but your card or PIN has not been lost or stolen, under federal law you will not be liable for the transaction if you report it within 60 days after your account statement is sent to you.
    • If someone uses your ATM or debit card without your permission and you don’t report it within 60 days after your statement is mailed to you, the potential damage is unlimited. You could lose all the money in that account, the unused portion of your maximum line of credit established for overdrafts, and even more.
    • A lot of banks do now issue what’s called a “zero-liablity” policy with some debit cards — which is meant to give you more protections. But, there are a lot of exceptions to those policies so you have to be careful and make sure you understand the details of the specific policy (which can get complicated).

Cons of credit cards

  • If you have a hard time controlling your spending, a credit card can get you into big trouble fast.
  • If you don’t pay off the balance in full each month before the due date, that’s when people start to fall behind — because when you carry a balance on the card from one month to the next, the interest charges kick in and that money is added to your overall balance.
  • When you’re only paying the required minimum each month, interest charges continues to add up — increasing the total balance even more — because keep in mind, when you only pay the required minimum payment, you still get charged interest. So as interest increases the balance each month, those minimum payments aren’t really even making a dent in getting that total amount paid off. It’ll take you longer to pay off the card and cost you more money over time — making the items you charged on the card a lot more expensive than what you paid for them. That’s when credit card debt can quickly spiral out of control.
  • Fees: Many credit cards come with some type of fee, or fees, so when you’re choosing a card, make sure to look for one with the fewest to no fees.

The best way to take advantage of the benefits of a credit card is to charge only what you know you can pay off at the end of the month. If you’re just starting out and trying to get control of your spending and saving, a credit card can be dangerous — so just be honest with yourself about what you can realistically handle.

Credit card interest example

Here’s an example to give you an idea of why paying off the balance on a credit card each month is so important!

  • The average interest rate on credit cards right now is around 15 percent.
  • Let’s say your credit card balance is $1,000 and you can only pay the minimum payment each month — around $20 to $25.
  • It would take you about 8 years to pay off that $1,000 — assuming you don’t charge anything else on the card — and you’d also pay more than $700 extra in interest.

When you carry a balance on the card from one month to the next, that’s when the interest charges kick in, adding to the total balance. So the longer you keep a balance on the card, the higher it continues to get each month.

When you pay the bill in full, meaning you pay off the entire balance so it’s back at $0, before the due date, you won’t have to pay any interest.

Avoiding fraud: When to avoid using a debit card

Debit and credit cards come with very different features and protections, and there are some situations when it’s always better to use a credit card.

There are some places where your card number and information are at a much higher risk of getting stolen, and if it’s a debit card, that could mean all the money in your bank account. So when you consider the vastly different fraud protections listed above, using a credit card where fraud is more common can help you protect your money — since again, a credit card comes with much better protections.

Some purchases may require an extra deposit if you use a debit card, which is a way for companies to guarantee payment in case you don’t have the money in your account to cover the charge, so it’s better to use a credit card in those situations. Plus, credit cards often include extra insurance coverage in certain situations, like travel cancellations.

So with all that in mind, here are some places and situations when you should avoid using a debit card if possible:

  • Pay at the pump
  • Shopping online
  • At the supermarket/grocery store
  • At the car rental counter
  • Booking advanced travel
  • When buying furniture and major appliances
  • When setting up automatic drafts and/or recurring bill payments
  • Independent ATMs
  • Restaurants
  • Anywhere you are a new customer
  • Small vendors like those at markets and other places you aren’t familiar with

If you only have a debit card, consider using cash when you can (obviously except for ATMs).

And if you only have a debit card, here are some ways minimize your risks:

  • Only use bank-affiliated ATMs. They offer a higher level of security, which means they’re less likely to be compromised by scammers. Never use independent ATMs, like those at gas stations or in other less-monitored areas.
  • When using an ATM, cover the keypad when entering your information — a criminal could be watching.
  • Don’t share your debit card PIN, don’t write it on the card and don’t write it down anywhere that someone could see it.
  • Always sign for debit-card transactions when possible.
  • If there’s a “tip” field/line on a receipt that doesn’t require a tip, or you aren’t giving a tip, take the extra precaution of writing in $0.00 on that line and also write in the total.

More ways to prevent and protect against fraud

  • Check your accounts and statements EVERY SINGLE DAY. The quicker you recognize a fraudulent charge, the better chance you have of resolving it and getting your money back.
  • Report any fraudulent transactions immediately.
  • Don’t pay any bill associated with fraudulent charges.
  • Never share your banking or other personal/sensitive information via email, text or phone (unless you call the bank directly). Even if the email or text looks legitimate (showing the bank’s logo etc.) it could very easily be a scam! Any time someone reaches out to you asking for personal or sensitive information, don’t give it to them right away. Instead, hang up or delete the email or text, and then contact the company directly — either by phone or by visiting their legitimate website directly.

Prepaid cards: An alternative to debit & credit

Prepaid cards have become an increasingly popular option for people who want to control their spending without worrying about the risks associated with debit cards.

Here’s how it works: you load money onto the card and use it like a debit card, since you’re spending your own money. But what makes prepaid cards different is that they are not associated with a bank account (like a debit card is).

They’re different from credit cards because there is no credit involved — you load your own money onto the card and you spend your own money. When the balance gets low, you just put more money on there.

Prepaid cards are typically accepted anywhere you can use a debit card. Some will let you pay bills online, set up automatic monthly payments and even get cash out of an ATM. There are also more options now for reloading prepaid cards — transfer money from the bank, link your paycheck via direct deposit, transfer money from PayPal or reload it at a local retailer like Wal-Mart.

Prepaid cards aren’t tied to a bank account, so you don’t risk losing all of your money in case of fraud. And because you can only spend what’s available on the card, you don’t risk racking up big credit card debt.

One of the disadvantages of prepaid cards is that, like debit cards, they do nothing to help you build credit. Plus, prepaid cards often come with a lot of fees, so you have to be careful and make sure you do your research before choosing one.

Choosing the right card for you

There are a few things to consider when you’re trying to decide whether you’re ready for a credit card, or if you should just stick with debit or a prepaid card.

If you have a credit card, you’ll still have a debit card as an option if you have a bank account.

So the first thing you need to figure out is whether you think you can use a credit card responsibly — and it’s crucial to be honest with yourself! Consider your spending habits and behaviors.

If you know you can control your spending, using a credit card can be very beneficial for your financial life. It will offer you better protections, help you build credit and earn you rewards at the same time. But the only way to make a credit card work in your favor is to use it responsibly.

Only charge on the card what you know you can pay off before the due date. That way you don’t risk interest charges adding up and increasing the total balance, which is when credit card debt can start to spiral out of control.

If you get to a point when you can’t pay the bill in full, pay as much as you can (to get the balance down) and always make sure to pay it on time. Late and missed payments can have a detrimental impact on your credit score — and for a very long time.

One other thing to remember: the amount of your total available credit that you use also has a big impact on your credit score — and you never want to use more than 30% of what’s available to you.

Let’s say you have a credit card with a $10,000 limit. If you’re carrying a balance month-to-month of $3,000, you’re only using 30% of the total limit. But if your credit limit is suddenly dropped to $3,000, then you’re using 100% of what’s available to you. That’s another reason to always pay down credit card debt as quickly as possible — you always want to make sure that your credit utilization rate is 30 percent or less.

Check out our Credit Reports & Credit Scores Guide for more on understanding your credit what factors impact it most.

Final thought: Be honest with yourself!

If you’re just starting to budget and trying to get a handle on your spending and saving, a credit card may be too tempting for you.
This is when you really need to think about your own personal behaviors, because getting into debt is a whole lot easier than getting out. And telling yourself that you can always pay it off later can get you into a lot more trouble than you realize — trouble that can follow you around for years, even decades.

If you decide you aren’t ready for a credit card, consider the different features of debit and prepaid cards.

A prepaid card can help you control your spending and you avoid the risks associated with debit cards. If you’re trying to develop better habits, use it as a budgeting tool. Only load onto the card the amount of money you truly need — then keep the rest of your money in savings.

If you stick with a debit card, make sure to take all the precautions listed above to minimize your risk of fraud and identity theft. If you’re trying to get control of your budget, try using cash or setting up separate checking/savings accounts for different areas of the budget. By keeping your money separate, you limit the potential damage if your card or card number is stolen, and it’s also a good way to get you into better budgeting habits.

For more on how to create, maintain and stick to a budget, see our Budgeting Guide.

Photo: Dreamstime